Thursday, 31 January 2019

Today’s post departs from the usual approach adopted here in
Financial Regulation Matters.
Usually, we will discuss elements within business and regulation that are breaking,
have a guest post, or we will preview forthcoming articles and books from this
author. Usually, the posts are not written in first person, but in this post I
will use that approach to discuss why the “fearless girl” statue is the focus
for this post.

I have visited Manhattan on a number of occasions, and those
close to me know that New York City represents something very special to me.
Quite often, when visiting the city, I will take a trip to Wall Street and take
in the surroundings. One element that is often on my to-do list is to take a
look at the legendary ‘charging
bull’ statue located near Battery Park and Wall Street. Whilst the
location is prime, it is worth noting that the original location, as placed by
the statue’s creator Arturo Di Modica, was directly
outside the New York Stock Exchange (we will discuss location later
on). The statue, as a piece of art, brings forward a number of emotions.
Despite the many tourists who visit the location of the statue and have their
pictures taken with it (some, for some reason, have their pictures taken behind
the bull which is a sight to behold, mostly out of confusion!) – it has been
said that the statue is ‘one
of the most visited, most photographed and perhaps the most loved and
recognised statues in the City of New York’ – the statue is
particularly thought-inspiring. An
article in Business Insider
talks of how the statue can be both seen as a symbol of the ‘strength and power
of the American people’ (according to Di Modica), ‘an image of a surging market
in the lore of high finance’ (according to a New York Times article published
not long after its erection in 1989), or a symbol of America’s ‘money, power,
greed, or high finance’. It is probably telling that, perhaps, all of these
statements are true. Personally, the charging bull represents strength,
determination, but also represents a forward-moving mentality that arguably
defines the city itself. The global domination of American finance, centred in
the City, is perhaps perfectly illustrated in the poised posture of the Bull.
Irrespective of what it means to every individual (a ‘selfie’ opportunity or
meaningful piece of art), it is indisputable that it is impactful.

The Fearless Girl, standing opposite the NYSE, to me now
takes on a whole different character. When she was facing the Bull, it was very
contextualised against a symbol in the Charging Bull. Now, however, she is
standing opposite an institution that is a real representation of American
power. The NYSE has a long and storied history, and its role as a facilitator
for moving money around, from, and to the American economy is unrivalled in
terms of financially-related icons in the American psyche. Now, the Fearless
Girl stands, hand on hips and with her head raised up towards the iconic
building, fearlessly. Art is defined
by the individualistic effect that it has, and I am certain that the statue
will elicit different reactions which is tremendously positive. When I visited
earlier this month, I was taken aback by the change in her appearance within
the new context. It is very much a parallel understanding, but she appears to
be much smaller in the new context, but at the same time she has grown
immeasurably in stature. Now, her resolve appears to be solidified,
irreversibly. When I considered writing this post, I thought deeply about my
position as a male commenting upon issues affecting women within society. There
are elements to the existence of a female that I cannot obviously know, but it
struck me that this 50-inch statue developed
by a company that itself has had a number of gender-equality issues,
has transcended its origins – its impact on me was considerable, but I wonder
what impact it would have on a girl, or a woman, examining it as I did. Would a
young girl take inspiration from the context within which the statue exists?
Obviously, there is no answer to that question, but one would certainly hope
so.

This consideration of the Fearless Girl’s impact upon women
of all ages, as well as men of all ages, led me to think about aspects that I
researched as part of this blog, and as part of past degrees. We have looked at
the issue of inequality on a few occasions here in Financial Regulation Matters, including variances such as gender
inequality, race
inequality, and many other variances. However, I was reading an article
in Business Insider recently that
cited a recent study into the issue of gender diversity at the CEO level, and
interestingly the correlation between that issue and the careers of those at
that level. The academic article, written by Vishal Gupta, Sandra C. Mortal,
Sabatino Silveri, Minxing Sun, and Daniel B. Turban for the Journal of
Management – entitled You’re
Fired! Gender Disparities in CEO Dismissal – aims to examine
‘whether CEO gender influences the likelihood of dismissal’. The researchers
discuss the opposing arguments within the literature that suggest, on one hand,
that women are given preferential treatment compared to men – ‘female
leadership advantage’ logic – whilst on the other hand women are disadvantaged
even after obtaining the highest organisational positions – the ‘glass cliff’ scenario
describes where ‘women in leadership positions face more perils and risks
compared to their male counterparts’. So, to examine this issue, the
researchers focused on large public firms in the US. Specifically, the study
uses board variable data, accounting data, stock return data, and a large
sample consisting of nearly 2,400 firms from 2000 to 2014 (CEOs who had been in
office for less than a year were not included as they are less likely to be
dismissed). The results of the study suggest a number of crucial
understandings. Though the total number of dismissals for men was substantially
higher, relatively ‘the percentage of
women dismissed is significantly higher than men’. Furthermore, the study finds
that ‘dismissal probability for female CEOs is less likely to be influenced by
changes in performance than male CEOs’. In addition to this, the study finds
that when a company is operating at ‘low levels of performance’, the dismissal
probabilities between the two genders do not differ, but when the
organisation’s performance improves the chances of a female CEO being dismissed
are significantly higher than that of their male counterparts. Ultimately, the
study concludes that female CEOs are 45% more likely to be dismissed, which is
an extraordinary statistic.

I will not discuss every element of the study, but its
findings are fascinating. The question is, however, what does it tell us in
reality? The scholars discuss the concept of ‘bias’ being commonly referred to
as one of the key issues, but that the study adds to the discussion by
confirming that women who break past the bias barrier are still extremely
vulnerable to having their livelihoods affected even after they reach the top of their fields. Bias, which is a
societal ill unlike most others, is clearly a core issue that must be
addressed, but those words mean very little. Yes, it must be addressed, but
how? That is a very difficult question to answer, and I do not offer a
quick-fire way that is achievable. One
way is to increase the education surrounding the issue, and studies like the
above help to influence that movement. However, it takes a commitment to that
education, and a real willingness to act upon an enlightened state that will
make the real difference. The issue is can that really happen in this world?

Nevertheless, if we return to the ‘Fearless Girl’ statue,
the effect of the understanding derived from the study is impactful. The hope
that I, and many others see as represented by the statue becomes contextualised
in a much different manner. For, say, a young girl looking at the statue opposite
the NYSE and dreaming of a high-flying career, what effect would the study
have? The positive spin would be that, when that young girl grew into a woman,
things may be different because of studies like the one above that highlight
the issue, and the pathway being developed for her by women who battle against
such bias even at the top of the hierarchy. A negative spin would be that a
vision is being developed at the ground-level which is not replicated nor
represented at the highest levels; the take-away sentiment is that, when it
comes to making money and leading
institutions, it is still regarded that a male will do a better job. Whether or
not this is technically correct is
another matter, and with the incredible amount of variables that would be
considered when attempting to scientifically examine that issue – though success
is success, and there is no reason why a male should be more competent than a
female, or a person of one race more competent than another in a balanced world
– it is not something to discuss here. But what is to be discussed is the
extraordinary impact that the concept of ‘bias’ has – it is fundamentally
attached to society and, if we were to take a holistic view, is perhaps the main impediment to equality. Yes,
again, education and enlightenment to these issues is important, but it will
take much more than that. It takes more than lip-service, and paradoxically to
this post, it takes more than a statue. What it will take is a fundamental and irreversible commitment to removing those barriers and examining
the competency of people, not just
categories of people. The study suggests that this competency-based assessment
is not the driving force behind decisions at the CEO-level, and that is
something that must change.

Yet, despite this, the ‘Fearless Girl’ is tremendously
important. As a piece of art it is impactful, but opening pathways of dialogue
on this issue is the statue’s greatest achievement. It strikes me that such a
diminutive piece of metal can be so impactful, but that is the beauty of the ‘Fearless
Girl’. Despite her origins (her ties to State Street should likely be ignored),
her new location, in my eyes, has elevated her importance. It draws people now
to the NYSE, and gives them the opportunity to reflect upon her performance
away from the hustle-and-bustle of the Charging Bull location. Whether or not
enough people take this opportunity to reflect and consider the issues at hand
are another matter, but one thing is for certain in light of the study we have
discussed in this post – the ‘Fearless Girl’s fearlessness is a necessary
characteristic for young girls and women of all ages in the pursuit of
equality. Furthermore, fearlessness is a necessary characteristic for all
people seeking equality. I encourage you all, if you visit the exceptional city
of New York, to visit this representation of equality in her new home.

It is important to note here two things: this post is
reacting to breaking media articles, and the case is still ongoing. However,
this is a massive twist in the tale that puts the government, via the Treasury
department, right at the heart of what is being referred to as the biggest
scandal in the UK since the Financial Crisis. This development, based upon a
systemic decision in the late 2000s to use taxpayer money to prop up a failing
and negligent and/or criminal banking sector, is a telling one in that there
are still conscious decisions being made in the banking institutions’ favour,
over SMEs in this case. Governments are theoretically developed to act for
citizens, and governments within capitalist societies are, for some,
theoretically designed to foster business development and protect those that
engage in business – neither of those viewpoints are on display here.

If we take a moment to look at the APA and its role, a
number of things come together in this story. The APA has now ceased
operations as of October 2012, but when it was in operation it existed from
January 2009 to ‘protect
banks against further exceptional losses on their assets’. According to the
Parliamentary report discussing the Agency, the Treasury made changes to the
scheme ‘to
better protect the taxpayer’ and that RBS and Lloyds had agreed to meet
published targets for ‘lending to households and businesses’. However, the
report fails to mention that the relationship between the Treasury and the
target banks would be particularly
close and, if today’s reports are to be believed, the relationship was one
where the Treasury exerted direct control over the business of the target
banks. In 2010 it was being reported that the APA were forcing RBS to take
on advisors of the Agency’s choosing with regards to the handling of toxic
assets, but this current suggestion takes our knowledge of the relationship
to a new level. The BBC suggests that
the stated goal of the APA was to ‘maximise the value of the assets ion the
scheme and reduce the probability of payouts’ – this makes perfect sense for an
Agency designated the task of monitoring the massive bailout given to RBS. However,
the influence of the APA is now being
brought to light. In the BBC’s
article, they discuss how the FCA’s lack of investigation into the GRG unit,
which eventually saw the Treasury
Select Committee release the scathing report itself was based upon the
suggested fact that RBS ‘would
have been able to point at government involvement’ for many of the issues
brought to light via that supposed investigation. This, if proven to be the
case, fundamentally changes this story.

RBS, and the GRG unit, committed acts that are appalling
when we consider the purpose of the unit and those who it affected. Although not
exactly the same as the infamous unit with HBoS, driving businesses into the
wall and scavenging on the remains is detestable. However, these allegations
against the government’s own Agency mean that the decisions taken by the GRG
unit were part of a systemic approach
to favour banks rather than citizens and SMEs. There is an argument to be
advanced that all of this was done in the name of maximising on the injection
into RBS and that, eventually, the taxpayer will not be negatively affected by
the whole sorry tale. But, that does not stand up under scrutiny. With such a
massive bailout, at a time when social spending was slashed massively (and
which continues to this day) and the British society continues to suffer from
the savage effects of austerity, the reality is that the British society, taxpayers included, have been negatively affected by this situation, and massively so.
Whether the government sees a full return on its initial injection is, at this
point, bordering upon irrelevant. Perhaps the reality is that the government
has showed its hand and, now, that approach is being brought to the public’s
attention. Favouring banking elites that brought the world to its knees in the
name of short-termism and profiteering is something that cannot go unnoticed
nor unchecked. It is said that the FCA will be conducting further
investigations into the GRG unit but, if today’s reports and the allegations
are true, the conduct of the APA must also be investigated. It is not an acceptable
truth that the government can and will intervene in private business for the benefit of private business. If
RBS had to fail for that to be the standard, then what would have been the
impact? Potentially contagion would have been witnessed at a much larger scale,
but arguments that society would be negatively affected by allowing such an
institution to fail are hard to hear when we know now, with the benefit of
hindsight admittedly, that society has been negatively affected by allowing
them to survive despite the actions they wilfully took in the pre-Crisis era.
It is important that the government’s role in this debacle is brought to light,
analysed thoroughly, and people are held to account. But, the sad truth is that
as the country deals with one of the major results of the Crisis – political instability
as demonstrated by the Brexit catastrophe – the results will overshadow the
cause. The country is primed to focus on the result of the infection and not
the origin of the disease itself. The conflation between government and private
business is almost tangible and it is likely that this current court case will
reveal a number of aspects to that established and thriving relationship.

Friday, 25 January 2019

Here in Financial
Regulation Matters we have discussed the precarious future of the British
high street on a number of occasions, ranging from discussing the collapse
of BHS, the rise in the number
of corporate failures, and the impact that the personal
debt crisis is having upon the futures of high street stalwarts. We also
looked recently at the case of House of Fraser, both in relation to its near-collapse
and then its subsequent
rescue. As we speak, another British high-street mainstay – HMV – is in crisis
talks over a rescue bid from Sports Direct supremo Mike Ashley and, if
Ashley does incorporate HMV into his retail empire, then his imprint on the
British high street will be more than considerable. Therefore, in this post, we
will ask who is Mike Ashley and
question how the British high street will continue to be transformed in the
wake of such rapid development.

Michael James Wallace Ashley is 54 years old, and was born
in Burnham. Ashley is renowned for his reclusive nature, so very little is
known about his early years. It is suggested that after graduating from Grammar
School at 16, he played
squash at the county level until an injury cut short his playing career. In
1982, after relying on a £10,000 loan from his family, Ashley opened a sports
and ski shop and then, subsequently, opened a number of other stores across
London – by 1990, he had ‘opened
100 stores across the UK’. Towards the end of the 1990s, Ashley rebranded
these stores as ‘Sports
Soccer’, which would eventually become the ‘Sports Direct’ brand we know
today. Ashley’s pathway was not typical, and there are a number of anecdotes
which exist to supplement this narrative of Ashley becoming the business
powerhouse we know today his own way. The
Guardian details a story how, when meeting with retailing powerhouses in
the early 2000s to discuss the pricing of football replica kits, Dave Whelan –
the owner of former high street retailer JJB Sports – mistook Ashley for a
gardener and told the young entrepreneur ‘there’s
a club in the north son, and you’re not part of it’. The newspaper then
questions whether that interaction was the motivation, but Ashley then went on
to turn into a whistleblower and reported his rivals to the Office of Fair
Trading for fixing the price of football kits – the result was a devastating
blow to the industry and saw a number
of retailers investigated and ultimately fined.

It was commented that the ‘club in the north’ had been
smashed by a ‘canny
and aggressive operator’, and that canny and aggressive operator embarked
upon a massive M&A spree not long after this period. Since then, Ashley has
acquired a myriad of brands including Dunlop, Slazenger, Karrimor, Kangol, and many
others. These acquisitions allowed Ashley to stock his stores with
low-value products that would be devoured by the British public. During this
period of expansion, Ashley would suffer personally, with the well-publicised
divorce from his then-wife Linda Jerlmyr in 2003 resulting in a then-record
divorce settlement of £50 million. Yet, in 2007, Ashley embarked on his
most public business venture yet when he purchased Newcastle
United Football Club for an initial £55 million, rising to £133 million.
This decision has been one that has had mixed results for Ashley. The move has
propelled him into the British public like no other, such is the appetite for
Football in Britain, and has forced him to be more public than one assumes he
would like to be. However, only yesterday it was announced that Newcastle
United are, based on 2017/18 revenue, the
19th richest football club in the world. Whilst Ashley is
embroiled in public discourse over his ownership of the club, and is
technically looking to sell the club, it is proving to be particularly
lucrative.

Yet, this story of a self-made British billionaire contains
controversy too. His lifestyle is something that has filled many column inches,
with stories of excessive drinking, large gambling ventures, and an overall
difficult personality surrounded by a very close circle being
chief amongst that coverage. However, it has also been noted that Ashley is
courteous,
professional, and forward-thinking by a number of people who have worked
with him in the past. However, perhaps one of the most damaging controversies emanated
from a series of reports into working conditions at Sports Direct’s massive
warehouse in Derby. The Guardian, in
producing a series of investigative reports, likened the warehouse to a ‘gulag’
and observed a number of work practices that it described as ‘workhouse’ not a ‘warehouse’.
The details of the investigation can be found here,
but the impact upon public perception should not be underestimated.

As is the way with media cycles, however, the dust soon
settled after those investigative reports in 2015. Now, the focus is on both
the tycoon’s handling of Newcastle United, and his approach to purchasing a
number of high street brands at discounted prices, on account of their
struggles. There has been opinion in the press that this HMV deal will be a deal
too far for Ashley, and that ‘he
has his hands full with House of Fraser’. This may be the case, but
analysing Ashley’s development suggests a different eventuality.

Ashley is in the process of reforming Debenhams, and with
his takeover of House of Fraser now complete, it is likely the British high
street will some amalgamation of the two brands. Additionally, if he can purchase
HMV, there is a natural amalgamation between that brand and the Game brand
which he already owns. It appears that Ashley exists on the principle of economies of
scale which, although it is a rather simplistic understanding of what is a
very complicated business, provides a model for both why Ashley has been
successful and also what will likely protect him from the American powerhouse,
Amazon. Though retail figures fluctuate wildly, it is
not being suggested that the high street will cease to exist – people are
continuing to shop on the high street. What is changing, however, is the
methods with which retailers can operate in such an inhospitable climate –
perhaps Ashley’s model is the only one which can survive such an environment.

The self-made billionaire is constantly being questioned,
and having his business decisions queried. Yet, if we look at his progression,
he is extraordinarily successful. Critics of his move into football, and there
are many, need only look at the recent financial figures from the footballing
world to see why he was attracted to
the marketplace in the first place. For Ashley, the goal is to develop and
expand, and as a result he is a very rich man. His methods are often
questioned, and examples such as the working conditions in Derby make his story
one of massive public interest, but it is unlikely the trajectory of his story
will change any time soon. In following the pathway Ashley has followed –
ruthless expansion – there will often be many controversies (we can think of Apple
using sweatshop labour where many commit suicide as a prime example), but
he will continue his success. That success will likely be typified by a
different high street than what the British public are used to. The new high
street will be characterised by lower cost items, and a lot of
cross-pollination between the stores – expect to see a number of the same
brands available in very different stores. The British public will adapt to the
changes, and Ashley will more-than-likely rewarded for having the foresight to
capitalise on the misfortune of a number of his rivals, just as he did in the
sporting retail arena.

Monday, 7 January 2019

In today’s post, we will look at something which we have
covered a number of times here
in Financial Regulation Matters, and
that is the personal debt arena which continues to increase. After official
figures were released recently, we can continue to chart this dangerous phenomena.
However, we will examine this issue in relation to a number of connected
issues, like consumer spending, to examine what is, in effect, a massively
systemic cycle.

We looked at the issue of growth on the British high street
on a number
of occasions last year, and only last week it was reported that the British
retailer Next had recorded
an increase in revenue over the
Christmas period, against its own expectations. Whilst the company is rightly
anxious over making any financial predictions with the year that the UK has in
front it, the news has been well received by Next, its investors, and the High
Street moreover. However, in other news, ‘a
“perfect storm” of factors’ has resulted in new cars sales in the UK falling to
their lowest since 2013, which has caused relative shockwaves. A provisional
figure of 2.36 million ‘units’ sold in 2018 represents a 7% drop on 2017. The
Society of Motor Manufacturers and Traders said there is a confidence problem in
the UK, based upon aspects such as Brexit and a shortage of some vehicles due
to a new emissions testing scheme, although analysts are suggesting
that a much bigger ‘storm’ lays ahead. We will, no doubt, cover this issue in
more detail as the year progresses, but what of the connection between rising
personal debt and these larger economic issues?

The reality is that economic growth is now, fundamentally,
tied to consumer borrowing. Gone are the days when the spending of wages constitutes growth because, quite
simply, there would be very little growth to speak of. As we live in a world
where consecutive and consistent growth is the staple of the modern economy,
and where any shocks (such as that caused by Apple’s
relatively poor performance recently) are front-page news, relying on
something which has taken the biggest blow since the Crisis is not an option.
The effect of this is that personal credit is not only easily available, but systemically encouraged to continue to
feed economic growth forecasts. That economic growth is something separate to
the real world is the reason why this current era is being referred to as a ‘personal
debt bubble’ because, quite frankly, something has to give. Yet, the
political arena is now consumed with the notion of the ‘here and now’, and focusing
on making any change that would affect the economic ‘here and now’ is not only
not considered, but actively discouraged.
The result, therefore, will be the same as always. The growth in personal debt
is a massive indicator that lessons from the financial crisis were not learned.
Perhaps lessons were learned with respect to RMBS, derivatives, CDOs and CDSs
(although this is highly debatable), but the lessons that needed to be learned
about short-termism and cyclical behaviour clearly have not been learned. We
can expect to see more news about the debt levels rising, people living in a
consistently precarious position, and associated markets suffering as a result.
Small ‘wins’ like that experienced by Next are not to be considered the norm,
as it is more likely the experiences of the auto industry in the UK will become
the standard moving forward. Each jurisdiction is different and therefore will
have different indicators, but the message is the same – cyclical thinking is
here to stay.

Tuesday, 1 January 2019

As 2019 begins and we look back on 2018, it has been, as
always, a busy year for the world of business and the regulators tasked with
controlling it. In this review post, we will look back over the year by sector,
and discuss some of the flashpoints to analyse whether there are any themes
that can help us foresee what 2019 has in store. Before that, I would like to
thank everybody for their continued support of the blog, and also all of those
kind contributors who have provided guest posts throughout the year. Also, in a
bit of shameless promotion, my first two books are now available for purchase
and I would like to thank everybody at Routledge for bringing Regulation
and the Credit Rating Agencies: Restraining Ancillary Services to life,
as well as everybody at Palgrave Macmillan for bringing The
Role of Credit Rating Agencies in Responsible Finance to life.

A Year of Failure

There were a number of high-profile failures this year, and
many were socially impactful. In 2016 we witnessed the collapse of BHS with
thousands of employees left stranded and at the mercy of the Pension
Protection Fund, but this year we watched as Carillion, the contractor
intertwined with the Government via a ‘private public partnership’, struggle
and ultimately fail. The impact of the failure was far-reaching, with key
hospitals (amongst other socially vital institutions) left unbuilt. The fear
was that ‘contagion’ would set in and cause a number of other vital providers
to fail, and at the end of the year we witnessed that fear become a reality
with the news that Interserve
was also struggling. Right at the end of the year the news was that
Interserve had managed to agree
upon a rescue plan, despite the collapse of their share price, but in
reality the provider teeters on the edge of collapse just as Carillion did at
the start of the year. This led us to discuss the fragility of the ‘PPP’ model,
and the importance of a governmental
safety-net, despite the reluctance of certain political parties to accept
that reality. Yet, other producers struggled as austerity, despite the claims
of some that ‘austerity
is over’ continued to take hold. The famous toy brand ‘Toys “R” Us’ failed
earlier this year, bringing
an end to a high-street icon in the UK and taking thousands of jobs with it.
Whilst we also saw a number of firms disappear including Maplin,
Conviviality, and Poundworld disappear. Furthermore, only the introduction
of Mike Ashley, who strengthened his grip on the British High Street as a
result, saw House
of Fraser saved in the final minutes of its existence. If we align this to
the fact that many
families are still struggling in this post-Crisis world, it is clear to see
that austerity is not over. In fact,
it is very much still alive and so are the consequences. Consistent increases
in food bank usage, a persistent attack on the benefit system, and also a continued
assault of the plight of children from poorer families means that, for
many, 2019 will be a similar story to that of 2018: struggle and hardship.

Regulators

In this blog, there is a purposeful focus on regulators and,
in the UK, it is difficult to look further than the FCA. The FCA has taken on a
prominent role in the wake of the restructuring that took place after the
Crisis, and as such sees itself involved in a number of key societal issues.
Arguably, the biggest story this year was that of RBS and the performance of
its ‘GRG’ unit which despite having the remit to help SMEs actually drove a
number into the wall. Akin to the same issue at HBoS, the GRG unit was widely
criticised for its performance and, as such, the FCA was looked upon to
regulate efficiently and protect those who had dealt with the particular unit.
However, the FCA chose to restrict information to the public and withhold a key
report that detailed a number of systemic
issues that made the GRG’s negative effect possible. This was discussed in
February when the Treasury Select Committee, and not the FCA, published
the full report for the public. Whilst not absolute in its condemnation for
the GRG unit, the report was damning for RBS and its role, which led us to
discuss in March ‘has
the FCA “gone soft”, or are its hands tied?’. The reason we asked this is
because the regulator was more than forthcoming with punishments for certain
people and firms (the Co-operative’s Paul Flowers was cited) but were less
forthcoming with punishing RBS. We asked why, and struggled to look past the
fact that RBS, as a result of the Crisis and the tax-payer rescue of it, is societally
important for the future of the UK, particularly as it faces such a tumultuous period
as a result of Brexit. Though the regulator is independent, it cannot be
overlooked that they take the political, and also geo-political realm into
consideration when deciding the ferocity with which they will punish.

This theme was repeated with other regulators, like the FRC
and the SFO specifically. The two regulators had difficult years, with the FRC
facing a massive
re-structure after years of tame regulation, and the SFO coming into
consistent conflict with the Government after a productive 2017 (as evidenced
by its victory when pursuing Rolls Royce for corruption). The SFO, which as we
have discussed is in line for a re-structuring and merging into the National
Crime Agency, suffered a humiliation
in its pursuit of Tesco executives at the end of the year, which leaves its
new leader, Lisa Osofsky, with a difficult task ahead of her in 2019 as she
battles to keep the SFO sailing in the right direction. It is clear that
regulators have to balance a number of competing issues, and that often those
issues are things they cannot really cite when making decisions. The impact of
Brexit, and the inevitable upheaval it has and will continue to produce, is a
constant factor for British regulators. Moving forward, it is almost impossible
that the same theme will not be repeated, with the focus needing to be on the
interest of the country as it moves into its post-Brexit phase.

Away from the UK, it has been another difficult year for a
number of high-profile banks. In the EU, Deutsche Bank continued to suffer from
what has been an incredibly challenging period for the banking giant. In 2017
it had agreed
to settle with the DoJ for just over $7 billion for crisis-era related activities,
and then in 2018 it had its credit rating slashed by S&P. It was also
suggested in June that Australian officials were preparing a case against the
bank, and others, for ‘cartel
charges’ over a A$2.3 billion issue. To further cement this troubling
period, S&P confirmed that the bank would remain in a negative position for
some time. In May, in the US, Wells Fargo continued to suffer over its decision
to create a raft of ‘fake accounts’, with even
more penalties coming its way in the shape of $1 billion from the Consumer
Financial Protection Bureau and the Office of the Comptroller of the Currency.
Adding to this was a class-action lawsuit totalling nearly $500 million, which
led to the suggestion that the bank would need to find another $2.6 billion to
cover the costs of the penalties in addition to what it had originally budgeted
for. Whilst there were a number of penalties levied against the banking giants
of the world in 2018, the effect was minimal at best. The result is one that
cannot be overlooked, with that result being that penalties are not designed to
seriously impact banks and that the
banks are far too big to be punished by financial means alone. We discussed ‘deferred
prosecution agreements’ in 2017 and, whilst they do have shortcomings, the
ability to directly affect the practice within these large corporate entities
is a potential regulatory tool for the future, particularly in this
too-big-to-fail era.

Gatekeepers

As this author focuses exclusively on the Credit Rating
Agencies, it is worth leaving the subject of ‘gatekeepers’ until last. Starting
with the audit industry first however, 2018 was a particularly challenging time
for the leading audit firms. Right out of the gate in January, KPMG
had to recuse itself from the Grenfell Tower inquiry on account of
perceived conflicts of interest in its advising on the organisation of the
inquiry – KPMG audited the company that produced the insulation for the tower.
Then, in February, KPMG
were again in the headlines for its connection, and poor performance, when
auditing Carillion. In April, the same firm was banned
by South African officials from auditing in the country on account of its
connection to the Gupta Scandal that was engulfing the country. Yet, it was not
just KPMG making the headlines. In July PricewaterhouseCoopers
was ordered to pay $625 million, on top of an earlier punishment of $5.5
billion in 2016, for ‘negligence’ regarding its audit of Colonial Bank in the
US. At the same time, although paltry in comparison, the British regulator the
FRC had set its own record when fining PwC £6.5 million for the poor
performance when auditing the failed high-street icon British Home Stores. The
FRC were highly critical of PwC in August regarding their auditing of BHS,
although the FRC were themselves criticised heavily for altering the report in
favour of Green and PwC, with MPs
venting their fury at the conduct of the regulator. As a result of these
transgressions, a number of parliamentary figures suggested that the ‘big
four’ be broken up, although in May we questioned here in Financial Regulation Matters whether
such calls were a demonstration of a misaligned focus that maintains the audit
firms oligopolistic superiority. Whilst the FRC attempted to fight its corner,
2018 was a difficult year for the regulator. The year ended with an independent
review calling
for its dissolution, and with it being labelled in the business press as a ‘hangover
from a different era’. Towards the end of the year, KPMG’s claim that it
would cease providing consultancy services to those that they audit seemed to
be a desperate response to the growing pressure against the oligopoly, although
we
discussed that this tactic was used after Enron to great effect and that,
importantly, such a move should not be left to the firms themselves to
implement.

For the Credit Rating Agencies, the year was actually positive.
This author produced a number of articles on the CRAs (available here,
here,
here,
and here)
but, in terms of business stories, the CRAs had a good year (for them). In June
China
opened its doors to the CRAs after suspending Dagong for its performance. As
China seeks to implement its massive ‘Belt and Road’ initiative, the business
for the CRAs will be lucrative as the massive initiative seeks financing for a
vast number of different operations. Then, in October, it was decided in the UK
that the FCA would be the regulator charged with regulating the CRAs after the
UK leaves the EU, which is the best option for the CRAs by far on account of a
smooth transition (the FCA is currently the ‘competent authority’ within the EU
regulations so that changeover should not be disruptive). With the penalties for
the CRAs’ involvement in the Financial Crisis beginning to fade after the two
large fines in 2015 and 2017, it seems that the industry is about to experience
another phase of concerted growth. If we add that all three of the Big Three
are now aligned to the Principles for Responsible Investing initiative, the
future looks bright for the CRAs at least – although this author cautions
against that expansion in the most recent book which is linked at the top of
the post.

2018

Ultimately, the year was tumultuous but not devastating.
Bearing in mind the political distortions in the western world, the feared
devastation that aspects such as the Trump administration and Brexit would
bring were not realised. Yet, in 2019, it is apparent that those fears are
replicated and, in some instances, heightened. March sees the UK leave the EU,
and the mid-terms in the US revealed a resurgence for the Democrat party that
will surely impact upon the Trump administration’s ability. 2019 promises to be
an interesting year for the world of business, with plenty of opportunity for
growth but continued failure. The demise of the British high street continues
to be of interest as the country continues to battle with the effects of
austerity, and the US continues to gear up to the 2020 election which will, no
doubt, have a global effect. In Europe President Macron is facing domestic
disorder which puts into question the health of the EU, particularly
considering that Angela Merkel will soon be stepping down from her role as
chancellor, and in China the country continues to strive to be a global
superpower, with the Belt and Road initiative being central to that economic
objective. Regulation will be key in managing those particular aspects, but the
question remains as it does every year – will regulators be given the tools to
effectively regulate?

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.